COVID-19: The silent killer of Malaysia’s growth

By Dr Lau Lin Sea

THE once seemingly distant threat of the COVID-19 outbreak in China has spread to the rest of the
world including Malaysia. To date, the virus has become a full blown global pandemic as declared by the World Health Organization (WHO) on 11 March 2020.

On the domestic front, Malaysia’s coronavirus cases have spiked in the past weeks. It is expected that the confirmed cases of COVID-19 will most likely climb significantly higher in the weeks to come.

Malaysia’s economy is likely to take a significant hit from the COVID-19 outbreak. The disease could adversely affect Malaysia’s economic growth mainly via decreased exports and investments, reduced production, weak consumption, and volatile commodity and financial markets.

The pandemic reduces the demand for Malaysia’s major commodities including crude oil and natural gas. China, the key customer in the global oil market which accounts for 80% of the world’s oil demand, has slashed its purchase of oil due to coronavirus. As COVID-19 is now spreading to other major economies including Europe, Japan and United States, there is growing uncertainty and panic in the commodity markets.

It is against this backdrop that Organization of the Petroleum Exporting Countries (OPEC) and Russia sparked the oil price war. As a result, the global oil price has plummeted as much as 30%. As a producer and an exporter for petroleum, Malaysia is relatively dependent on the price of oil to
generate its revenue.

The low crude oil prices will cause the government to lose billions of Ringgit in revenue. Thus, the collapsed oil price is expected to “force” the government to review its budget for 2020 eventually. This also implies that the government will need to look for alternative sources for revenue. One of the possible solutions to the problem of revenue shortage is to increase taxes that will be putting more burdens on the people.

The small and medium enterprises (SMEs) which constitute 98.5% of Malaysia’s businesses and
account for 37% of Malaysia’s GDP are vulnerable to the COVID-19 outbreak. The lockdown of cities and closure of factories particularly in China have disrupted the supply chain for raw materials needed by Malaysian firms. The shortage of raw materials interrupts production that in turn reduces Malaysia’s exports to the rest of the world.

Besides manufacturing industry, other sectors badly hit by the epidemic include tourism, transportation and retail businesses. These sectors are likely to suffer from tremendous loss in revenue due to a sharp drop of foreign tourists and fewer local tourists as more and more Malaysians prefer to stay at home rather than shop and eat out to avoid virus infection.

Overall, consumer spending is likely to diminish as Malaysian households start to spend more cautiously due to looming uncertainty caused by COVID-19.

With COVID-19 continues to weigh on the key drivers for growth, Malaysia’s economic growth is
expected to fall to a mere 3.7% in 2020 according to the World Bank. Indeed, the extent of the
damage caused by the virus on Malaysian economy will depend very much on how quickly the
pandemic can be controlled by the authorities globally and domestically. It is also determined by how much economic supports and resources the government is willing to deploy in order to reduce the adverse impacts during the epidemic and even aftermath.

The most recent announcement by the Prime Minister in restricting public movements and gatherings can be considered as a bold and timely action to curb the spread of COVID-19. This measure may cause short term inconvenience to the people, however, it will be beneficial to the country’s economy over the long run.

It is worth it, sometimes, to endure some short-term “pain” in order to have lucrative “gains” in the future. To stimulate the economy, it is also necessary for the newly formed Economic Action Council (EAC) to work on additional stimulus plans on top of the first stimulus package announced earlier. Extra measures with wider coverage are needed to support the people and the businesses at this difficult time.

Dr Lau Lin Sea is an Associate Professor from Faculty of Business and Finance, Universiti Tunku Abdul Rahman (UTAR). Her areas of specialty are development economics, environmental economics and tourism management. Her views do not necessarily represent those of this portal’s.

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